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    Jan. 8, 2015

CFTC Issues Guidance for Completing Annual CCO Reports of Swaps and Futures Firms

Pursuant to Sections 4d(d) and 4s(k) of the Commodity Exchange Act (CEA), which were added to the CEA by the Dodd Frank Act, registered futures commission merchants, swap dealers and major swap participants (collectively, registrants) are obligated to designate an individual to serve as the entity’s chief compliance officer (CCO).  The duties and qualifications of such CCOs are set forth in CFTC Regulation 3.3.  Regulation 3.3(e) requires a CCO to “prepare a written report that covers the most recently completed fiscal year of the [registrant], and provide the annual report to the board of directors or the senior officer” and specifies the matters that must be covered by that report (Annual Report).  The first Annual Reports were recently submitted to the CFTC’s Division of Swap Dealer and Intermediary Oversight (Division).  Upon review of those Annual Reports, and after discussions with registrants, the Division has issued a Staff Advisory providing guidance to CCOs on completing Annual Reports.  The CFTC’s Annual Report requirement is in addition to the SEC requirement that investment advisers conduct a general annual compliance review.  See “How Hedge Fund Managers Should Approach Preparing For, Conducting and Documenting the Annual Compliance Review (Part One of Two),” Hedge Fund Law Report, Vol. 5, No. 12 (Mar. 22, 2012); and Part Two of Two.

Answers to Questions Most Frequently Asked by U.S. and Other Non-E.U. Managers on the Impact and Implementation of the AIFMD

The Alternative Investment Fund Managers Directive (AIFMD) continues to dominate discussions on global hedge fund regulation, marketing, remuneration, risk, reporting and related topics.  In this guest article, two of the leading global authorities on the AIFMD – Samuel K. Won, Founder and Managing Director of Global Risk Management Advisors, and Simon Whiteside, a Partner in the London office of Simmons & Simmons LLP – provide comprehensive answers to 14 of the questions most frequently asked by U.S. and other non-E.U. managers on the impact and implementation of the AIFMD.  Specifically, Won and Whiteside discuss the viability of reverse enquiry; the interaction between capital introduction and reverse enquiry; reliance on national private placement regimes; remuneration, side letter and leverage disclosure; AIFMD versus Form PF; content and frequency of AIFMD reporting; Annex IV reporting on master funds; and AIFMD-relevant risk management and reporting considerations.  See also “A Practical Comparison of Reporting Under AIFMD versus Form PF,” Hedge Fund Law Report, Vol. 7, No. 41 (Oct. 30, 2014).

K&L Gates Partners Outline Six Compliance Requirements and Four Enforcement Themes for Private Fund Advisers (Part Three of Three)

This article is the third in a three-part series discussing practical insights from a recent presentation on insider trading and compliance priorities by K&L Gates partners Michael W. McGrath, Carolyn A. Jayne and Nicholas S. Hodge.  This article summarizes six noteworthy compliance insights and four recent enforcement themes relevant to hedge fund managers.  The first article in this series provided background on critical aspects of insider trading doctrine (including entity liability and special considerations for CFA charter holders) and described four enforcement patterns bearing directly on hedge fund trading strategies and operations.  The second article detailed eight prophylactic measures that hedge fund managers can implement to avoid insider trading violations and also included a detailed discussion of what McGrath called “the next great undiscovered country for enforcement actions.”  On insider trading, see also “Second Circuit Overturns Newman and Chiasson Convictions, Raising Government’s Burden of Proof in Tippee Liability Insider Trading Cases,” Hedge Fund Law Report, Vol. 7, No. 47 (Dec. 18, 2014).

SEC Settles Enforcement Action and Pursues Company Founder over Use of Backtested Performance Data

Performance advertising remains an SEC enforcement priority and can be a minefield for hedge fund managers.  See “OCIE Director Andrew Bowden Identifies the Top Three Deficiencies Found in Hedge Fund Manager Presence Exams and Outlines OCIE’s Examination Priorities,” Hedge Fund Law Report, Vol. 7, No. 38 (Oct. 10, 2014).  The use of hypothetical or backtested performance is particularly problematic.  See “Under What Conditions Can a Hedge Fund Manager Present Hypothetical Backtested Performance Results?,” Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).  Consistent with these regulatory priorities, the SEC recently settled an enforcement proceeding against an investment adviser whose founder claimed that the adviser’s strategy had been used to manage actual client assets since 2001, even though the strategy was not devised until late 2008.  The claimed performance was, in fact, backtested.  This article discusses the enforcement action.  For a discussion of other performance advertising issues, see the HFLR’s articles on GIPS compliance claims, testimonials and social media, cherry picking and case studies, use of gross performance results and use of other firms’ track records.

Report Offers Insights on Seeding Landscape, Available Talent, Seeding Terms and Players

Due to the institutionalization of the hedge fund industry, it is more and more difficult for emerging managers to start a fund management company and develop a track record without a significant amount of initial capital.  Seeders offer aspiring fund managers the capital to develop the infrastructure needed to run a successful hedge fund management business, often in exchange for a share of the manager’s revenues.  A recent Special Research Report issued by Infovest21 offers an overview of available seeding structures, the talent pool for emerging managers, common seeding terms and the growing role that institutional investors play in seeding.  For another look by Infovest at the seeding market, see “Seeding, Strategic Stakes and the Evolving Market for Third-Party Investments in Hedge Fund Management Businesses,” Hedge Fund Law Report, Vol. 6, No. 20 (May 16, 2013).

Investment Regulatory Veteran Genna Garver Joins Dorsey & Whitney

Dorsey & Whitney LLP announced on January 7 that Genna Garver has joined as Of Counsel in the firm’s Corporate Group in the New York office.  She will serve as Chair of Dorsey’s Investment Regulation Group.  For insight from Garver, see “Connecticut Welcomes You! Federal Financial Regulatory Reform Restores Connecticut’s Authority over Hedge Fund Advisers,” Hedge Fund Law Report, Vol. 3, No. 30 (July 30, 2010); and “Implications of the Volcker Rule – Managing Hedge Fund Affiliations with Banks,” Hedge Fund Law Report, Vol. 3, No. 10 (Mar. 11, 2010).

Mark Asset Management Names Jerry Bright Head of Marketing and Investor Relations

On January 5, 2015, Mark Asset Management announced that Jerry Bright has joined the firm as Head of Marketing and Investor Relations.  For insight on hedge fund marketing, see “What Is the Difference Between Marketing and Reverse Solicitation Under the AIFMD?,” Hedge Fund Law Report, Vol. 7, No. 42 (Nov. 6, 2014); “What Do the Investor Advisory Committee’s Recommendations Mean for the Future of Marketing of Hedge Funds to Natural Persons?,” Hedge Fund Law Report, Vol. 7, No. 40 (Oct. 24, 2014); and “Davis Polk and Sidley Partners and MFA GC Address the Maze of Hedge Fund Marketing Regulation in the U.S. and E.U. (Part One of Three),” Hedge Fund Law Report, Vol. 7, No. 38 (Oct. 10, 2014).  For insight on hedge fund investor relations, see “PLI Panel Provides Regulator and Industry Perspectives on Ethical and Compliance Challenges Associated with Hedge Fund Investor Relations,” Hedge Fund Law Report, Vol. 6, No. 25 (Jun. 20, 2013).

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